Don’t worry.  It’s not complicated.

I offer a simple explanation for the recent fall in oil prices in just two charts.

Oil prices move up and down in response to changes in supply and demand.   If the world consumes more oil than it produces, the price goes up.  If more oil is produced than the world consumes, the price goes down.

That’s where we are right now.  The world is producing more oil than it is consuming. The price of oil goes down.  It’s that simple.

The chart below shows when the world has been in a production surplus and a production deficit since 2008. Right now, we are in a production surplus so the price of oil is going down.

(Click image to enlarge)

The important thing to take away from this chart is that the production surplus is smaller so far than the last time this happened between March 2012 and March 2013.  Then, oil prices fell quickly but recovered in about a year.  The difference between these two events, however, is that monthly average oil prices have fallen 27% so far but only fell 18% in 2012-2013.

The difference is found in quantitative easing (QE), the Federal Reserve Board’s policy of pumping huge amounts of money into the U.S. economy.

QE ended in July 2014, the exact month that oil prices started falling.  What a coincidence!  This is shown in the chart below.

(Click image to enlarge)

What is the connection between QE and oil prices?  World oil prices are denominated in U.S. dollars so the more the dollar is worth, the lower the price of oil and vice versa. That’s a well-known fact.

When the Fed started printing money like crazy after the Crash in 2008, the value of the dollar was kept artificially low compared with other currencies.  The ever-weakening U.S. dollar dampened the impact of production surpluses and deficits on the price of oil.

When QE ended in July 2014, the dollar got stronger and the price of oil went down as it always does when this happens. The coincidence of the end of QE with the onset of a production surplus created a perfect storm for oil prices.

There is nothing especially different about this latest oil-price fall compared to any of the others except the end of QE.  It’s not really about shale or the Saudi decision not to cut production.  It’s about a relatively ordinary oil-production surplus that happened at the same time that QE ended.  And, there are few geopolitical fear factors now to mask the production-consumption balance as there have been in recent years (that will change, I am certain).

What’s the message?  Oil prices will recover and I doubt that we will see years of low prices as many have predicted.

31 Comments on "The Oil Price Fall: An Explanation in Two Charts"

Dean on Mon, 12th Jan 2015 5:20 am 



Did you use the EIA international statistics for OECD countries or other dataset?
Thanks

Bandits on Mon, 12th Jan 2015 5:49 am 



“It’s about a relatively ordinary oil-production surplus that happened at the same time that QE ended”………….
QE tapered to an end. So a surplus occurred immediately QE ended. Riiight, I’ll believe ya but convincing everyone else might be a problem.

Davy on Mon, 12th Jan 2015 7:41 am 



The problem with this traditional econ 101 view with the added QE taper effect via the dollar explaining the oil price fluctuation is it detached from oils underlying fundamentals of depletion. Depletion of oils economic value and the multiple PO dynamic issues both below and above ground are not acknowledged as playing a part maybe the most significant part.

MSM, financial analysts, and politicians find it hard to get their heads around depletion hence the incomplete explanations of what is happening. To admit to depletion is to acknowledge PO and that is like opening Pandora’s Box for these mainstream folks. Economist are influenced by technology, knowledge, markets, and substitution in their view of energy. Economist rule now often at the expense of science. Until PO dynamics and the science of depletion is acknowledged we will continue to see incomplete explanations. Our PO message would be incomplete if we disregarded supply and demand fundamentals so I am saying the two must be reconciled to have an effect view forward.

Dubya on Mon, 12th Jan 2015 9:11 am 



Aah, the first data I have seen that quantifies this planetary oil glut.
0.5% surplus works out to 7 minutes per day excess production.

Peak oil is Dead!

Pops on Mon, 12th Jan 2015 9:15 am 



LOL, the most significant part is oversupply – no more no less.

Depletion of oil’s economic value? You mean oil is 50% less valuable today as 6 months ago?

LOL

Perk Earl on Mon, 12th Jan 2015 10:40 am 



There’s no way to get away from demand playing its role in establishing a price. If demand had been high enough at whatever supply level, the price would have remained high or gone higher. The fact that price dropped as far as it has with the supply slack not being absorbed so far, I think is evidence of the weakness of the world economy.

Also, for the petro dollar to go up in value (by ending QE), it did do so at the expense of other currencies. The Euro has been declining in value as well as emerging market currencies, so their demand for oil is not increasing to help reduce over supply.

One article I read at zero-hedge said now the stimulus has stopped for the first time since 08, we will finally see what the economy can do on its own. Apparently one of those factors is the re-pricing of oil. It’s down sharply again today.

Lastly, the value of a barrel of oil is dependent on its energy content, which is depleting, as eroei descends. At this juncture in time, the value of the petro dollar, demand for oil and supply are repositioning to a new (non-stimulus induced) value. We will see where it bottoms out.

Perk Earl on Mon, 12th Jan 2015 11:27 am 



http://www.zerohedge.com/news/2015-01-12/commodity-carnage-continues-copper-crude-crushed

Commodity Carnage Continues – Copper & Crude Crushed

Is it really about demand after all, just as Saudi Prince bin Talal warned.

You can see from the chart on Copper it’s been falling hard too; copper being a commodity that mirrors world economic health.

bobinget on Mon, 12th Jan 2015 11:46 am 



“Oil Price Fall: An Explanation in Two Charts”
At least this hubristic headline admits fakery.

Oil is down (today) because hedge funds are “talking their books”

IOW’s shorting markets.

There is zero connection between supply/demand, if, such a scenario ever truly existed.

India’s oil imports are and will take up any surplus.
http://www.indiatvnews.com/business/india/indian-economy-to-grow-at7-percent-in-2015-16688.html

http://www.theglobeandmail.com/report-on-business/international-business/asian-pacific-business/india-on-brink-of-quantum-leapmodi-tells-investors/article22403511/

If China is projected by Goldman Sacs to ‘slow’ one half of one percent, thereby eliminating 50%
of future oil demand (oversupply) Goldman neglects to mention India’s remarkable come-back in this cheap oil environment.

Communist China’s “slowdown” to a ‘projected seven percent causes handwringing in Capitalist
America while India’s growth is ignored.

Short or long position traders pick and choose articles published to buoy what ever positions taken
in the last hours.

If you’re interested, I’ll demonstrate why oil prices
are no longer connected to a free and transparent market.

While there certainly is no set of simple reasons for oil to have dropped 55% in a few months after trading around $100 for years. I’ll try to point out one overarching component.

shortonoil on Mon, 12th Jan 2015 11:47 am 



This analysis is faulted because it assumes that oil always has, and always will have the same value to the economy. In essence it is saying that the petroleum industry has cracked the Perpetual Motion Machine problem. Only an economist could believe such a Fairy Tale. In reality a barrel of oil only had 27% of the value in 2014 that it had in 1960 for the end consumer. It is called by a very esoteric term that is apparently not found in economics texts: depletion

We hope that these economists get out of the oil prediction business in the near future. Maybe they can get into something that they really understand, like constructing demand/ supply curves for flying pigs instead of:

If more oil is produced than the world consumes, the price goes down.

If the value of the oil is going down, then demand goes down. The value of oil has been declining faster than its supply has been changing for several years. That is why a supply increase of 1.5% has suppressed prices by 50%. Following their logic if supply increased 3% prices would go to zero. Of course that is nonsensical, but we expect them to keeping pulling out their demand/supply curves, and applying it to the wrong thing. They just can’t seem to get their head wrapped around any other concepts, regardless of how ridiculous the ones they have may be!

http://www.thehillsgroup.org/

Davy on Mon, 12th Jan 2015 12:09 pm 



Bobby said – At least this hubristic headline admits fakery. & If you’re interested, I’ll demonstrate why oil prices are no longer connected to a free and transparent market.

Bobby, while you are at it will you demonstrate how economic statistics are no longer connected to a free and transparent market. You are fine with using figures as they support your message if the numbers don’t support your message then you claim they are bogus numbers. That is selective analysis in my book.

Northwest Resident on Mon, 12th Jan 2015 12:13 pm 



“Following their logic if supply increased 3% prices would go to zero.”

Which proves that it isn’t “logic” that they are using to try to convince us that the dramatic oil price drop is due to a 1.5 over-supply (i.e., “glut”).

What they ARE using to try to explain this non-logical conclusion to us is a toxic combination of lies, spin, denial and blind desperate hope. Good luck with all of that when TSHTF.

bobinget on Mon, 12th Jan 2015 12:16 pm 



Peak Earl, Copper is a tiny market, easily manipulated, compared to petroleum which takes deeper pockets.
(copper, unlike oil, can and is recycled in a secondary)

You are correct about copper and oil often in tandem. This time copper, the tail is being wagged by the dog, oil.

If you had billions to ‘play with’ and, you could also
control a particular swing commodity, (like oil)
Just saying, you would NOT be losing money if you were ‘shorting against the box’.
IOW’s simply state there’s overproduction, over produce, kill prices, collect on short positions to make yourself whole while using that commodity to BK competitors. Thereby gaining greater market share and eliminating a bothersome free market.

IMO, Russia and China and KSA are into this conspiracy up to their wallet pockets.

Here’s a link for people looking to make sense
of current Oil price Wars;

http://finviz.com/futures.ashx

It’s kinda neat. Just let your cursor rest over any
commodity and a chart will appear.

Understand hedge funds don’t really believe in any market imbalance either. If you playing with tiny sums like 500 millón or less, you need to guess what corner markets, public opinion are headed.

Apneaman on Mon, 12th Jan 2015 12:58 pm 



My analysis has shown that it is mostly English speaking white men who try to explain anything and everything in a chart or two.

bobinget on Mon, 12th Jan 2015 1:18 pm 



Davy, lets look at events over the past 72 hours.
Three, count em, broke into a Paris newspaper and cold blooded killed 12. The next day a probable single confederate terrorized dozens of shoppers in a Jewish market, killing three.

Needless to say this outrage played huge over the week-end, two million gathered to protest these killings. There was wall to wall coverage. These suicide murders succeeded in drawing attention to their insanity.

“One death is a calamity, a million deaths, a statistic”. (Joseph Stalin)

In boring statistical terms millions are perishing in
Syria/Iraq with almost no press. (reporters are not welcomed by either side.

http://www.sacbee.com/opinion/editorials/article5664384.html

Would you care more about these Oil War victims
if they were shopping at Wal Mart or eating at the corner deli? I’m guessing you would have more compassion for murdered fellow countrymen….
Fearing of course for one’s own safety.

http://www.sacbee.com/opinion/editorials/article5664384.html

Many readers and posters here are puzzled by
Climate Change deniers. We question motives
of financiers of anti science propaganda. Most come to the conclusion purveyors of fossil fuels are
like cigarette companies, coal companies trying to minimize and belittle climate change information.

The US is currently using great military might
to protect Mideast, African, perhaps, soon South American oil supplies from ‘unfriendies’.
(agree so far?) If not, why?

The US is Allied with Saudi Arabia in the Kingdom’s effort to overthrow Syria’s government.
Russia and Iran are taking the opposite view.
In point of fact, a state of war exists between
several major oil powers.. OPEC members.
Still here?

Now can you tell us why the plight of six million Syrian Refugees?
Can you spare empathy for black folks?
One million Nigerian in country displaced by Boko Haram.

Two million oil war refugees in South Sudan.
Many Libyans have lighter complexions, how about them?

How much longer can we deny World Wide Oil Wars? Are human lives more or less valuable
then a barrel of $46.22 oil?

Apneaman on Mon, 12th Jan 2015 1:32 pm 



Compassion? We are Capitalists, we don’t do compassion.

Apneaman on Mon, 12th Jan 2015 1:33 pm 



Today’s Media Language A Little Too Much Like 1984′s Newspeak

http://rabble.ca/news/2015/01/todays-media-language-little-too-much-1984s-newspeak

bobinget on Mon, 12th Jan 2015 1:37 pm 



Ford, GM ready super-cars for Peaked Oil.

The Ford GT made a triumphant return today with the unveiling of a sleek and edgy supercar the automaker plans to build next year.

Ford will make a limited number of GTs for sale in the second half of 2016. It will be a global car but the first sales will be in the U.S., said Executive Chairman Bill Ford.

Ford kept the car largely secret until about a month ago when news began to leaks and spread on the internet.

The GT was among a trio of performance vehicles Ford showed. As expected, Ford revealed the next-generation 2017 F-150 Raptor high-performance, Off-Road Pickup.

USATODAY
2015 Detroit auto show
The third was the Shelby GT350R Mustang: a stripped down, track-ready and street legal version of the GT350 shown in November at the Los Angeles Auto Show.

The three are among the more than 12 new Ford performance vehicles coming by 2020 as the automaker has reorganized its regional performance divisions into a single global unit. Ford wants to take advantage of a 70% INCREASE in performance vehicle sales in the U.S. and a 14% increase in Europe.

The GT marks the return of the rear-drive mid-engine super car which was last sold in the 2006 model year. It returns for 2016, the 50th anniversary of the first of the GT40’s four consecutive wins at the 24 Hours of Le Mans race.

DETROIT AUTO SHOW: The latest news, photos, videos

“Ford shook the automotive world when it introduced America’s first true exotic car in 2005,” said Karl Brauer, senior analyst with KBB.com, and a GT owner. “Now the Blue Oval is poised to do it again, only this time there will be a street and a race version of the car. This allows the automaker to pay homage to Ford’s 1-2-3 sweep at Lemans 50 years ago, while creating the possibility it will do it again. Dealers, start your waitlisting!”

The new GT will feature a 3.5 liter twin-turbocharged EcoBoost V6 engine, generating more than 600 horsepower . The last GT had a 550-horsepower supercharged 5.4-liter V8.

Ford CEO Mark Fields said the lightweight body and aerodynamic shape will enable the V6 to exceed 600 horsepower.

Ford said the car will be assembled in a “purpose-built” facility but he would not say if it will be in the U.S.

“The business case is never why you do a car like this,” Ford said. “It is a statement vehicle; but we want it to make business sense.

bobinget on Mon, 12th Jan 2015 1:48 pm 



How much did you read about this?

Car bomb kills 37 at Yemen police academy
Sanaa, Jan 7, 2015, (AFP)

A car bomb tore through dozens of Yemenis lined up at a police academy in Sanaa today, killing 37 in the latest attack highlighting the country’s growing instability.

A car bomb tore through dozens of Yemenis lined up at a police academy in Sanaa today, killing 37 in the latest attack highlighting the country’s growing instability.
Police said another 66 people were wounded in what it described as a “terrorist bombing” targeting potential police recruits, in a statement cited by the official Saba news agency.

Unstable and impoverished Yemen has been hit by a wave of violence in recent months, with a powerful Shiite militia, known as Huthis, clashing with Sunni tribal forces and the country’s branch of Al-Qaeda.

The charred remains of the dead, mostly young men, were piled on the sidewalk outside the academy alongside blood-soaked documents they had been carrying.

The wreckage of a car sat nearby, with little remaining but mangled metal and the steering wheel, one of several cars that were still burning at midday.

A security official told AFP the bomb was in a minibus, of which only scraps of metal remained.

Rescue workers loaded bodies into ambulances, which pushed their way through gathered onlookers, many taking pictures of the carnage with their mobile telephones.
The health ministry urged Sanaa residents to “donate blood at government hospitals to help the wounded”.

It was not immediately clear who was behind the blast but Al-Qaeda in the Arabian Peninsula (AQAP), the jihadist network’s powerful affiliate in Yemen, has claimed responsibility for previous attacks on security forces.

Speaking to AFP at the scene, a member of the unofficial Huthi security forces blamed “radicals belonging to Al-Qaeda” for the attack.

And a Huthi statement denounced “this despicable crime,” whose perpetrators “will not go unpunished.”

http://www.eia.gov/countries/cab.cfm?fips=ym

bobinget on Mon, 12th Jan 2015 2:00 pm 



Price of oil continues to fall. Has it become less valuable? Fewer BTU per barrel?

Oil Wars Update;

http://www.independent.co.uk/news/world/africa/nigerias-forgotten-massacre-2000-slaughtered-by-boko-haram-but-the-west-is-failing-to-help-9970355.html

One of Africa’s most senior church leaders has accused the West of ignoring the threat of the militant Islamist group Boko Haram, days after the reported slaughter of up to 2,000 people by the group.

Ignatius Kaigama, the Catholic Archbishop of Jos and president of the Nigerian Bishops Conference, spoke as bodies lay strewn on the ground in Baga, in north-east Nigeria, after a surge by Boko Haram fighters who took over the border town earlier this month.

He highlighted the stark difference between the West’s willingness to act when 17 people were killed by militants in France and the approach to the slaughter in Africa.

Estimates of the death toll in Baga and surrounding villages, which were razed by fire, have been put at up to 2,000. Most of the dead were women, children and the elderly who could not flee in time, said Amnesty International, which labelled it the group’s deadliest massacre yet.

A further 30,000 people are thought to have fled their homes, 7,500 seeking sanctuary in Chad and the rest adding to Nigeria’s tens of thousands of displaced people.

Posted note:

Folks in Africa, Mideast and South America are as in touch with European events as are we.

When ‘The People’ regain control of resources,
as they will, they will not forget who helped and who did not.

“The death of one person a calamity, deaths millions a statistic”. (Joe Stalin)

Perk Earl on Mon, 12th Jan 2015 3:35 pm 



“Peak Earl, Copper is a tiny market, easily manipulated, compared to petroleum which takes deeper pockets.

(copper, unlike oil, can and is recycled in a secondary)

You are correct about copper and oil often in tandem. This time copper, the tail is being wagged by the dog, oil.”

Bobinget, maybe smaller than the oil market, but apparently still an important indicator of what is going on in the world economy. Below is a link with more information:

https://insights.abnamro.nl/en/copper-price-economic-indicator/

‘Copper price as an economic indicator’

– There is a strong correlation between copper prices and global economic activity
– Cyclical, fundamental and external factors have a major impact on the copper price
– To some extent, the price is an indicator of the world economy

”Copper is a major component of the economy and plays a particularly important role in emerging countries. At a global level, China is a major player, accounting for a major share of both the consumption and production of copper.

Copper is a vital part of our daily lives. Given the wide variety of its applications, it is often suggested that the trends in the copper market are a useful leading indicator of the state of the world economy. And in fact, the metal is sometimes referred to as “Doctor Copper”. This report sets out the relationship between the copper price and a wide range of economic variables. Which economic or other indicators have a strong correlation with copper, and what are the key drivers? Can the copper price be considered an indicator of the world economy? Our analysis shows, among other things, that the copper price has a strong correlation with numerous indicators that are relevant for tracking the world economy.”

shortonoil on Mon, 12th Jan 2015 3:51 pm 



“Price of oil continues to fall. Has it become less valuable? Fewer BTU per barrel?”

It is amazing, and will probably be tragic that on a site dedicated to the decline of oil that so many can fail to understand the implications of the concept of depletion. A concept that was discussed, and recognized over 2000 years ago by our ancestors. A reality that is as obvious as the inevitability of death itself. Yet they deny it, and replace it with streams of regurgitated media hyperbola acting more like programed autotomata than cognitive functioning biological creatures. One must ask, is it possible that thinking humans can be conditioned into robotic appliances? Has the “Brave New World” arrived?

GregT on Mon, 12th Jan 2015 4:12 pm 



The war on Islam, uh, um, sorry, I meant Terrorism, is about to be ramped up to an entirely new level. Expect further erosions of personal freedoms and civil liberties, millions more displaced individuals, and hundreds of thousands more ‘mistakenly’ murdered as collateral damage.

2015 is ramping up to be quite the year for the banksters and their ilk.

Sobotai on Mon, 12th Jan 2015 4:15 pm 



Hi Shortonoil,
‘hope you don’t mind if I ask a remedial question. When I go through the Hills Group slides it seems to me that the declining BTU/barrel is another way of expressing EROI, using thermal rather than financial units. Is that correct, or am I missing something. My physics degree is a bit dusty.

Mark Ziegler on Mon, 12th Jan 2015 4:48 pm 



If you were right oil would not be cheap in Russia. This is oil flexing its global influence which has little to do with the US. Truly a global situation.

cybersleauth

GregT on Mon, 12th Jan 2015 5:10 pm 



“Has the “Brave New World” arrived?”

Not quite yet, but they’re working hard on it. We’re still in the period referred to as the ‘great endarkenment’.

DMyers on Mon, 12th Jan 2015 9:14 pm 



Shortonoil’s depletion theory explains the situation better than anything else. This is how I imagine it works.

The stock of real, hundred dollar a barrel oil is still out there. But it is increasingly diluted/polluted with fifty dollar a barrel oil (aka shale and distillates and other bottom of the barrel species). As the 50 caliber gets increasingly mixed in with the 100 caliber, the buyer finds increasingly that he got a barrel of 50 dollar oil, when he paid a full 100.

As the uncertainty increases as to whether one is going to get 50 or 100 caliber oil, the market responds by going with 50 fits all. With that, you might get a good buy, but you’re not going to get screwed.

Davy on Tue, 13th Jan 2015 5:36 am 



Well Put DM for those of us like me who enjoy getting a technical explanation in a simple mind picture.

Speculawyer on Tue, 13th Jan 2015 6:14 pm 



If drop in oil price was due to the dollar getting stronger . . . then why isn’t pretty much everything that we import much cheaper?

Duh.

Plantagenet on Wed, 14th Jan 2015 1:48 am 



Depletion plays no role in current oil pricing. The collapse is oil prices is caused by an oil glut

marmico on Wed, 14th Jan 2015 5:39 am 



Shortonoil’s depletion theory explains the situation better than anything else

The quart shy of oil is a moron. His October 18, 2013 proffer of $200 per barrel in 2020 is here.

Davy on Wed, 14th Jan 2015 6:19 am 



Marm, are you denying the scientific reality of depletion? Is it not happening in any way shape or form? Do you believe substitution, markets, and technology will come to the rescue? That is some strong faith you have.